Savers in Spain are eagerly waiting for banks to improve the remuneration of their deposits. Despite the European Central Bank (ECB) raising interest rates four times in a year to reach 3%, Spanish banks have not shown any interest in capturing the savings accumulated by families during the pandemic. This article aims to explain why Spanish banks are not improving deposit remuneration.
Deposits: The Impact of ECB’s Tightening Monetary Policy
To control inflation, the ECB has raised interest rates four times in a year to reach 3%. The president of the European supervisor, Christine Lagarde, has warned that new increases will be carried out in the next meetings. This tightening of monetary policy has immediately passed through to variable-rate mortgages, but it has not translated into an improvement in deposits.
No Move on Deposits in Spain
Unlike in neighboring countries such as France or Italy, where banks begin to offer remunerations of more than 2%, Spanish entities do not make a move on deposits. Instead, they are selling mutual funds that invest in public debt, which are having a lot of success. The funds are a more complex financial product, not suitable for all publics since they imply assuming a greater risk.
Deposits: How Banks Work
To understand why this is happening, we need to remember how banks work. The classic business of banks consists of capturing money from some clients, in exchange for remuneration, to lend it to other users who need it, charging an interest rate. Normally, banks ask individuals for money offering them a remuneration in exchange. They are those striking percentages that appear on the walls of bank offices or on bank websites: 3%, 5%, etc.
Deposits: Banks’ Profit
In addition to commissions, banks make a profit from the difference between what they charge individuals who apply for loans and what they pay to customers who lend their savings. For example, a bank grants mortgages to clients with interest at 3%, while remunerating deposits at 1%. The difference between those amounts is what the banks earn.
Capital Cushion and Solidity of Balance Sheets
The financial crisis caused the regulations on capital requirements to have tightened. In other words, the capital cushion now has to be higher. The solidity of the balance sheets of financial institutions has also improved a lot. In addition, banks have been able to increase liquidity, thanks to the fact that interest rates were low in the last decade.
Reduction of Financial Entities Operating in Spain
Another consequence of the financial crisis was the reduction of financial entities operating in Spain, due to a concentration of the sector through mergers. The five big banks —Caixabank, Santander, BBVA, Sabadell, and Unicaja— controlled 69.3% of banking assets in Spain in 2021, according to ECB data. This means that there is less competition than in other European countries.
Banks’ Focus on More Profitable Loans and Mortgages
After the rate hikes by the ECB, variable-rate mortgages have become more expensive. Therefore, banks are getting more money with the loans and mortgages granted, because the interest paid by individuals is higher. Therefore, banks do not need to resort to the market to ask for money. “There is liquidity in the system. Financial institutions are not eager to attract deposits,” Peio Belausteguigoitia, CEO of BBVA Spain, recently assured at an event organized by El Español and Invertia.
Banks’ Resistance to Rewarding Citizens’ Savings
Another important reason for banks not to improve the remuneration of deposits is that it would detract from their benefits. For this reason, they resist rewarding citizens’ savings and offer investment funds instead of deposits.
Q: Why are Spanish savers waiting for banks to improve the remuneration of deposits?
Spanish savers are waiting for banks to improve the remuneration of deposits because they have accumulated savings during the pandemic and want to earn more interest on their money.
Why have interest rates been raised by the European Central Bank?
Interest rates have been raised by the European Central Bank to control inflation.
Q: What is happening with deposits in Spain?
Spanish banks continue to show no interest in capturing the savings accumulated by families during the pandemic, and they have not translated the tightening of monetary policy into an improvement in deposits.
Q: Why are Spanish banks not offering remunerations on deposits like their neighboring countries?
Spanish banks are not offering remunerations on deposits like their neighboring countries because they are getting more money from loans and mortgages granted due to the recent hikes in interest rates by the ECB. Also, offering high-interest deposits would detract from their profits.
Q: What are financial products banks launch to raise money?
Banks launch interest-bearing accounts and fixed-term bank deposits to raise money.
Q: What do banks earn from lending money?
Banks earn profit from the difference between what they charge individuals who apply for loans and what they pay to customers who lend their savings.
Q: Why do banks resist rewarding citizens’ savings and offer investment funds instead of deposits?
Banks resist rewarding citizens’ savings and offer investment funds instead of deposits because it would detract from their profits.
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